Electronic exchange systems of today can generate high trading volumes during short time intervals, creating very fast moving markets. In these fast moving markets when many participants want to trade at the same time, and/or prices change quickly, delays in traffic often occur. Because of the high concentration of participants and the high rate of messages in such systems, trade executions and confirmations slow down, and reports of prices lag behind actual prices. Thus, response times for orders and quotes increase, and the immediate risk is that market participants can experience unexpected losses very quickly. Hence, participants active in the market put themselves and/or their clients in risky situations. Market makers, in particular, may expose themselves to very high risks due to their special role in the market.
A market maker may be a person or a firm which quotes in securities such as financial instrument or commodities, thus providing liquidity to the market and in return for this may be granted some advantages. The special situation for a market maker is described below.
In this document the definition of securities is taken from the official definition of securities, from the Securities Exchange Act of 1934, and is as follows: “Any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a ‘security’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing.” Furthermore in this document, a security also includes currency or any note, draft, bill of exchange, or banker's acceptance.
Market makers have a special position since they often provide liquidity and take risk in the market. In order to provide liquidity to the market, they provide quotes in multiple securities and may take positions in a lot of securities during a short time interval. If during such a situation multiple quotes are matched and traded, the risk curve for the market maker could rapidly and dramatically change, thereby exposing the market maker to more risk than expected. Thus the price exposure in the electronic exchange may create a risk to the market makers since they can quickly accumulate a large risk position before they can delete/change their existing orders. This type of price exposure is known as in-flight fill risk.
Therefore there is a need for systems that prevents, e.g., market makers, from being exposed to the in-flight fill risk, thus reducing the risk for unwanted and rapid changes of the risk curve.
There exist systems that provide simple approaches to reduce high-unexpected speed of trading. Usually these systems include a monitoring system located at the client site. However these approaches are not effective because of the speed of the electronic exchange systems today. A monitoring system at a client may take a few seconds or up to as much as 10 seconds before it reacts and can stop the orders sent from a participant from being matched. During this period, many thousands of orders could be matched and traded at the electronic exchange system. As a result, electronic exchange systems have developed simple monitoring systems that monitor the speed of trading per participant or per trader at the exchange. If the speed of trading exceeds a predetermined limit, the exchange system automatically triggers actions to protect this participant or user from further exposure in the market.
One such system is described in US patent application US2004/0199452 which discloses a method and system that allow traders to protect against in-flight risks using order risk data provided by traders. The order risk data includes order risk parameters, such as delta, gamma and/or vega. Delta is a measure of the rate of change in an option's theoretical value for a one-unit change in the price of the option's underlying contract. Thus, delta is the theoretical amount by which the option price can be expected to change for a change in the price of the underlying contract. As such, delta provides a local measure of the equivalent position risk of an option position with respect to a position in the underlying contract.
Gamma is a measure of the rate of change in an option's delta for a one-unit change in the price of the underlying contract. Gamma expresses how much the option's delta should theoretically change for a one-unit change in the price of the underlying contract. Theta is a measure of the rate of change in an option's theoretical value for a one-unit change in time to the option's expiration date. Vega is a measure of the rate of change in an option's theoretical value for a one-unit change in the volatility of the underlying contract. Delta, gamma, and vega are the primary risk management measures used by those who trade in options.
However, another risk management measure for evaluating in-flight fill risk is to keep track of the trade volume especially recent trading volume. Recent trading volume is the number of traded instruments during a time interval.
Today, the recent trading volume count is calculated by continuously adding, for example the volume from each individual matched trade, and keep track of each trade's volume and its timestamp, and then continuously subtract volume of trades outside the scope of the measured time interval.
Thus, each individual trade needs to be maintained as long as it is included in the recent trading volume count. Keeping track of high numbers of trades, time stamps etc. utilize system resources.
Furthermore, evaluating which trades' volume should be removed from the recent trading count, and updating the count and the trade collection, also utilities additional system resources, these calculations are very processor demanding, and therefore use processor time that could be used for executing other tasks.
Hence there is a need for an improved system and method for monitoring trading at electronic exchanges, and thereby decreasing risk exposure for participant at the exchange and at the same time performing the task in the most efficient way in order to save system resources such as processor time and memory utilization.